Cover Story: The Latest Canadian Intel

Matei Olaru

Matei Olaru, Lift & Co.

Infused product manufacturers will get a crack at selling edibles, beverages, extracts and topicals in Canada when those items likely become legal later this year. But the proposed rules unveiled last December by the country’s health department present multiple challenges, too.

Below, Matei Olaru, the CEO of Lift & Co., a Toronto-based, publicly traded cannabis-focused technology and media company that provides consumer insight and data to cannabis businesses, shares his perspective about the demand for infused products in Canada, the barriers to entry and the critical business opportunity for Canadian and U.S. manufacturers.

 

Tell us about the proposed rules for edibles in Canada.

Edibles, concentrates and topicals are slated for legal sale in Canada under the Cannabis Act no later than Oct. 17, 2019. Health Canada’s proposed regulations for additional cannabis products are not dissimilar to the cannabis legislation that came into force Oct. 17, 2018, with a focus on protecting youth and responsible use.

These regulations include limits of 10 milligrams of THC per package in solid or beverage form, 10 milligrams of THC per unit of ingestible extracts and a max of 1,000 milligrams of THC per package for ingested or inhaled extracts and topicals—as well as regulations around plain and childproof packaging, ensuring that products are not appealing to kids nor mixed with nicotine or alcohol.

Canadian licensed producers will have the benefit of a year in legal sales of flower, oils and capsules under similarly strict regulations to make decisions with respect to edibles and concentrates. However, this is more burdensome than what we’re seeing in legal jurisdictions in the United States.

 

What are the greatest barriers to entry?

Ultimately, this is a new major consumer packaged goods (CPG) industry with very restricted marketing and advertising and a vacuum of market data. As a manufacturer or a brand or a retailer, you’re expected to educate an extremely uninformed consumer base with very few tools. This is a barrier in and of itself.

Regulations around food production will pose additional challenges for manufacturers. For example, infused products must be manufactured in a building that is completely separate from all other food production for that company. This will create a barrier at the beginning for smaller entrants with less infrastructure already in place or less startup capital, which will result in fewer options for consumers in the legal market at the beginning.

Proposed regulations currently recommend a limit of 10 milligrams of THC per package—not per serving—for edibles and beverages. By comparison, limits in Colorado and Washington state are 10 milligrams of THC per serving, and we know that products in Canada’s illegal market have higher potency products. This poses a challenge to bring consumers over from the illegal market to purchase new legal products.

 

What are three critical considerations for manufacturers that want to produce infused products in Canada?

First, there are strict regulations. This is an entirely new, distinct type of business. The onset of legalization in October 2018 created a large-scale commercial agriculture business. The legalization of edibles, concentrates and topicals is a monumental evolution from agriculture to true manufacturing, which brings with it tighter standard operating procedures, stricter quality assurance and quality control. Manufacturers need to be aware of the complexity of this category in Canada, both from a regulatory standpoint and also to ensure they are conforming to the Cannabis Act.

Second, data will be king. Manufacturers that also are looking to put a product into market, build a brand and find and engage with consumers will need to formulate their plans around understanding the market and their potential customers. Market data in consumer preferences and behaviors are essential to understanding who their consumer is and how they’re using cannabis. When edibles and concentrates become legal later this year, and supply and demand level out, understanding the data around who buys products and how much they’re spending will be critically important in Canada, where brands can’t easily interact directly with consumers.

Third, in lieu of traditional marketing, consumer education is the key. Canadian cannabis is an emerging, multibillion-dollar CPG industry that cannot market like any other CPG because of strict regulations that create significant marketing inefficiencies and a disconnect between consumers, producers and retailers. Consumer education, particularly through the brick-and-mortar retail system, will be of utmost importance to driving consumer purchase decisions and early brand differentiation.

 

What’s the critical business opportunity for infused product manufacturers in Canada?

Canada is the largest federally legal market in the world with early evidence of strong consumer demand, based on early consumer trends and the size of the illicit market. Statistics Canada released data in March showing that Canadian household spending on cannabis totaled $4.4 billion (CA$5.9 billion) in the fourth quarter; however, $3.5 billion (CA$4.7 billion) of that was with illegal cannabis.

When cannabis edibles become legal in late 2019, there will be a first-mover advantage to get in front of budtenders who influence purchase decisions, as well as to develop an early brand relationship with consumers through compliant marketing strategies.

Thinking more broadly, this is the first federal legalization of this category. While the dollar size of the addressable market is smaller than the U.S., this is a major opportunity for manufacturers operating in Canada to take the lead globally by setting a standard of excellence for product quality and operating procedures that can then be exported internationally.

Find strategic ancillary partners and gather the data on what works. Otherwise, you’re blind.

 

This interview was edited for length and clarity.